Paid preparers must complete due diligence

Last week I wrote about what to look for in a tax preparer. Now it’s your turn. With all of the new restrictions and penalties on the preparer, there are a few things the client must be made aware of. Those paid preparers who have a PTIN number from the IRS must exercise due diligence when engaging with the client.

The first consideration is that the paid preparer is not obligated in anyway to perform an audit on data submitted to him. He should be able to rely on the information submitted by the client. But the paid preparer must exercise due diligence so as to avoid a preparer penalty of $1,000 per return. The paid preparer should ask probing questions regarding the deductions to be claimed. By so doing it accomplishes two goals: It helps practitioners to meet their due diligence obligations, and these questions should help clients avoid potential audit adjustments and penalties.

To indicate the seriousness of these endeavors the IRS had sent out letters that included guidelines for various forms and schedules on the returns. For example, cash contributions should be supported by canceled checks or written acknowledgement from the recognized charity. In addition a donation of $250 or more must receive a written proof that states if there were any goods or services received. In this particular case a cancelled check for the $ 250 will not be sufficient. In relation to donations of clothing they must be in good condition and a complete list of the garments and all household goods will require verification and receipts by the host charity. These documents should be presented to the preparer but does not have to be filed with the return. They must be available for verification in the event of an audit.

Earned Income Tax Credit (EITC)

A new feature for 2011 is the completion and the inclusion of the Form 8867 when filed. This form asks pertinent information regarding this credit. The 23 questions asked determine whether the taxpayer is eligible for the EITC. This credit is available for low to moderate-income working persons. Many people who have claimed the EITC in the past are familiar with the “right” answers to give and scam the system. As a result the error rate is about 25 percent and results in about $15 billion paid out incorrectly. Besides using this form the paid preparer should use a common sense approach to the answers given and in doubt refuse to add it to the return. Failure to properly complete this form will cause the paid preparer to receive a $500 penalty.

Unreimbursed business expenses

The paid preparer should exercise great care in completing this portion of Schedule A, Miscellaneous deductions which include travel, meals or entertainment. All requests for these expenses should have complete documentation and receipts including a log for all business miles traveled. An important question to be asked would be whether the employer would reimburse the taxpayer for these charges if requested. The nature of the employees job and relation of the expenses claimed to the amount of salary should also be discussed with client.